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Foreign Direct Investment in Latin America and the Caribbean Rises

According to Economic Commission for Latin America and the Caribbean (ECLAC) report. Brazil and Chile registered greatest increase

Posted: March 16, 2005 > Net FDI Flows by Country, 1990-2004  

Jose Luis Machinea
Foreign direct investment (FDI) in Latin America and the Caribbean rose 44% in 2004 to reach US$56.4 billion. In South America the increase reached 48% (US$34.103 billion), while in Mexico and the Caribbean Basin, 43% (US$22.273 billion). This is the first year that FDI in the region has risen since 1999.

In the report, Foreign Investment in Latin America and the Caribbean, 2004, presented today by José Luis Machinea, Executive Secretary of the Economic Commission for Latin America and the Caribbean (ECLAC), this trend is considered "very positive". However, it warns that the region has still not overcome the problem of attracting foreign capital. The challenge of capturing FDI that provides greater benefits to receiving countries remains.

Compared to the rest of the world's, the region's percentage of foreign capital inflows has fallen steadily in recent years, reflecting "evident weaknesses in competing for newer, higher-quality investments (in higher-technology manufactures, research and development centres and new services such as those related to shared back-office activities, software and regional headquarters)".

The countries with the greatest increase in foreign capital were Brazil (79%) and Chile (73 %). Brazil was the largest recipient with over US$18 billion followed by Mexico with almost US$17 billion. Argentina rose over the previous two years. Trinidad and Tobago, El Salvador and Colombia also saw FDI rise, while Panama and Venezuela experienced a downturn.

The United States remained the region's largest investor (32% of flows), given the decline in European investment, especially from Spain. Asian investment remains low.

In line with trends worldwide, between 2002 and 2003 the service sector received most FDI (51%), although these were mostly traditional services and not those with a higher technological content, which is preferable. Manufacturing (36%) came next, followed by the primary sector (13%).

The contribution from privatization programmes has lost ground as a factor attracting foreign capital, to the purchase of private sector assets. The presence of transnational firms among the largest companies operating in Latin America and the Caribbean has fallen in recent years. The ECLAC report reveals that their place has been taken by growth from local private firms that, as they start up operations in other Latin American countries, have become known as translatinas (Petrobras, Telmex, América Móvil, Cemex, Companhia Vale do Rio Doce, Femsa, Odebrecht, Carso Group).

China has emerged as a serious rival for FDI flows for some of the region's countries. For Mexico and the Caribbean, this Asian country now represents major competition for efficiency-seeking investment. In contrast, for South America, China offers opportunities as a destination for its natural resource exports.

ECLAC studies reveal that FDI does not automatically offer benefits to receiving countries and that these vary depending on the strategies applied by transnational firms (search for natural resources, local markets, efficiency in conquering third markets and technological assets).

Because of this, the UN regional body recommends that receiving countries more clearly define what they expect from FDI, and assign them a role within the framework of their national strategies for developing production. Unlike Europe and Asia, Latin America and the Caribbean still have few efficient institutions that evaluate the policy in this area to determine whether they achieved the desired effects.

Source: Economic Commission for Latin America and the Caribbean


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